$1.9T wipeout in crypto risks spilling over to stocks, bonds — stablecoin Tether in focus

The dangers posed by stablecoins to the traditional market cannot be dismissed due to Tether’s exposure to the U.S. credit system.

$1.9T wipeout in crypto risks spilling over to stocks, bonds — stablecoin Tether in focus

The cryptocurrency market has lost $1.9 trillion six months after it soared to a record high. Interestingly, these losses are bigger than those witnessed during the 2007 subprime mortgage market crisis — around $1.3 trillion, which has prompted fears that creaking crypto market risk will spill over across traditional markets, hurting stocks and bonds alike.

Crypto market capitalization weekly chart. Source: TradingView

Stablecoins not very stable

A massive move lower from $69,000 in November 2021 to around $24,300 in May 2022 in Bitcoin’s (BTC) price has caused a selloff frenzy across the crypto market.

Unfortunately, the bearish sentiment has not even spared stablecoins, so-called crypto equivalents of the United States dollar, which have been unable to stay as “stable” as they claim.

For instance, TerraUSD (UST), once the third-largest stablecoin in the industry, lost its dollar peg earlier this week, falling to as low as $0.05 on May 13.

UST/USD daily price chart. Source: TradingView

Meanwhile, Tether (USDT), the largest stablecoin by market cap, briefly fell to $0.95 on May 12. But, unlike TerraUSD, Tether managed to recover back to near $1, primarily because it claims to back its dollar peg using good old-fashioned reserves, including the real dollars and government bonds.

Crypto spillover risks

But, that is where the trouble began, according to a warning issued by rating agency Fitch last year. The agency feared that Tether’s rapid growth could have implications for the short-term credit market, where it holds a lot of funds, according to the company’s reserves breakdown disclosure.

If traders decide to dump their Tether, the most-popular dollar-pegged stablecoin in the crypto sector, for cash, it would risk destabilizing the short-term credit market, Fitch noted.